“Crypto is so volatile!”: this is a fairly common complaint in the trading community. But what is volatility exactly? How do we measure it, and how do crypto assets fare in this regard? This is what we will cover in this short guide.
What’s Volatility in Crypto?
In finance, volatility measures the variation of a given asset’s price over time and more precisely the strength of these variations. The more volatile an asset is, the riskier it is. Two assets might have the same return at the end of a period (daily, monthly or yearly), but the first one might be swinging from extreme highs to lows, while the other is steadily rising (or falling). Volatility helps account for this – and we’ll see it’s an important metric to follow.
The time horizon for volatility is often yearly: we then talk about annualized volatility. For assets that are traded on the stock market, such as equities, a year is made of 252 days. That’s because physical stock exchanges all over the world are not active every day (they are typically closed on weekends). Crypto is traded online, 24/7, year-long. So its “year” is indeed composed of 365 days.
As you can see in the graph above, crypto is more volatile than other assets. Compare BTC and ETH volatility with Standard and Poor’s 500 (SPX) and Nasdaq-100 (NDX), two stock market index indexes: there is a clear gap. One of the reasons is the afore-mentioned difference in trading days. Since the crypto market is active 24/7, it technically exhibits more volatility. Moreover, cryptos are a relatively new class of asset. As a result, they are not yet fully regulated, and may still suffer from hacking. This creates further uncertainty (and hence volatility). The lack of history, especially for altcoins, also means that price movements are difficult to anticipate.
How to Analyze Volatility
Volatility is a useful metric when it comes to evaluating the risk of a strategy compared to its return. As we saw in the first section, two strategies might have the same return but contrasting volatilities. Investors want to achieve the highest level of return with the minimum possible amount of risk. They would therefore choose the strategy with the smallest volatility.
Period: 2022-10-13 to 2021-10-24
But what if both performance and volatility are higher? Let’s have a look at a real-life HAL example. The chart above tracks the annual performance and volatility for Wise: BTC and Pulse: BTC. Pulse: BTC performed slightly better than Wise: BTC, but its volatility was also much higher (steadily over 30%, while Wise: BTC never went over the 30% mark).
This is when the Sharpe ratio comes in. The Sharpe ratio is a performance/volatility ratio: a higher Sharpe ratio signals that the strategy is performing well compared to its risk level. In our example, it might help us decide which strategy had a better overall performance. Wise: BTC’s Sharpe ratio is -1.01, while Pulse: BTC is -0,09. Pulse: BTC has a better performance compared to its risk, even though both have a negative Sharpe ratio, due to BTC’s poor performance over the period.
HAL vs Volatility: Focus on Our Strategies
Volatility is a key concern for all traders, and even more so for crypto traders. HAL’s catalog offers many strategies, each with their own approach to volatility. But they do have a common goal: reduce the volatility of an investment compared to simply buying and holding the underlying asset.
- Wise strategies are long-only, trend-following strategies. They strive to catch uptrends, and go neutral in bear periods with higher volatility. Looking at Wise: BTC vs BTC, we can see that BTC’s volatility is much higher, at some points reaching over 90%, while Wise: BTC was mostly under 50%.
- Pulse are also trend-following strategies, but they can trade on both uptrends and downtrends. Their volatility is usually around 50%.
- Artificial Intelligence (AI) Pick predicts the 3-top performers for the next 24 hours. It is designed to pick the most resilient strategies among a set of HAL trading bots on ETH & BTC. Its typical volatility is around 40%.
- Dynamic is an aggregation of 13 strategies, with a risk-control mechanism built on top of the algorithm. Its volatility target is around 50%.
Considering the data in the above chart as of the writing of this article, it’s interesting to see that this selection of HAL strategies helped reduce volatility compared to Bitcoin – as far as 38.46% for Wise: BTC vs. 66.42% for BTC – while significantly limiting losses, with Artificial Intelligence (AI) Pick even achieving +23.05%.
Remember you can always check these metrics (performance, volatility, Sharpe ratio, Maximum Drawdown) at a glance on each strategy’s profile page.
Crypto is volatile: that’s a fact. Algorithmic strategies can help keep some of that volatility in check, but remember that just as past returns are no guarantee for future performance, historical volatility does not always predict future volatility.
Looking to give a try to automated strategies aimed at benefiting from crypto volatility?
Investing involves risk, including the possible loss of all the money you invest. In particular, crypto-assets are a highly volatile and speculative asset class. HAL is only suitable for traders who are willing to bear the risk of loss and experience sharp drawdowns. Past performance is not necessarily a guide to future performance. The performances presented are real performances calculated net of execution fees and slippage from a proprietary Binance account.
The purpose of this material is to provide objective, educational and interesting commentary and analysis on developments in the crypto-assets sector. Nothing in this material should be interpreted as constituting an offer of (or any solicitation in connection with) any investment products or services by any member of the CoinShares Group where it may be illegal to do so. Access to any investment products or services of the CoinShares Group is in all cases subject to the applicable laws and regulations relating thereto.